U.S. stocks rally to higher close on Bernanke

MarkCotton

LeslieWines

NEW YORK (MarketWatch) -- U.S. stocks rallied Wednesday, with the Dow Jones Industrial Average adding more than 200 points, after soothing comments on inflation from Federal Reserve Chairman Ben Bernanke sparked hopes the central bank may stop raising interest rates soon.

Strong earnings reports from J.P. Morgan Chase and International Business Machines also lent cheer.

Some investors, however, cautioned against excessive optimism, saying the Middle East conflict remained a key issue for the market.

The Dow industrials
DJIA, -1.24%
surged 212.19 points, or about 2%, to close at 11,011.42, its biggest one-day point gain since June 29.

The Nasdaq Composite Index
$COMPQ
gained 37.49 points, or 1.8% to finish at 2,080.71, while the S&P 500 Index
SPX, -1.54%
rose 22.95 points, or about 1.9%, to end at 1,259.81 See full story.

"The general conclusion from his comments was that he was more dovish than he has been," said Al Goldman, chief market strategist at AG Edwards, referring to Fed chief's Ben Bernanke's prepared testimony to Congress. The term 'dovish' suggests Bernanke will be less aggressive about raising interest rates in the future.

Goldman pointed to the Fed chief's remarks that labor unit costs were being contained while measures of longer-term inflation expectations have edged lower. He added, however, that Bernanke's testimony makes no reference to the latest consumer price report that showed core retail inflation picking up. See full story.

Bernanke said inflation risks remain and the central bank is concerned about rising prices. But he said the economy is likely to slow and this should ease inflation pressures.

The Fed chief also said the full impact of past rate hikes has yet to hit the economy. His testimony fits with the rough consensus of economists who have said Bernanke will try to preserve the Fed's flexibility to either continue to raise rates or pause in August, depending on the central bank's interpretation of the latest economic data.

The Federal Reserve has raised its key short-term interest rate 17 times in a row in a bid to slow economic growth and choke off inflation. Its federal funds rate stands at 5.25%.

In spite of Wednesday's move, Goldman said, the focus remains the conflict in the Middle East.

"There isn't a real strong incentive for people to go aggressively after stocks when you have the Middle East as a tinderbox," he said.

On the broader market, advancers outpaced decliners by about 9 to 2 on the New York Stock Exchange and by nearly 4 to 1 on the Nasdaq.

In across-the-board gains, brokers
$XBD
airlines ($XAL), retailers
RLX, +0.00%
and biotechs
$BTK
were some of the most notable advancers.

Volume was 1.861 billion on the Big Board, and 2.366 billion on the Nasdaq.

Despite Wednesday's earnings and the Bernanke-inspired rally, the latest data revealed higher inflation and a cooling housing market, stoking concern the U.S. economy may be slowing down.

U.S. consumer prices increased a moderate 0.2% in June, the smallest gain in four months, but core inflation rose 0.3% for the fourth straight month. The core rate is now up 2.6% in the past year, a bit higher than the Federal Reserve is thought to be comfortable with. See full story.

In further confirmation that the housing market is cooling off, builders began new housing construction at a slower rate in June, the Commerce Department said Wednesday, as the number of building permits issued also continued to decline. See full story.

Bonds, dollar, gold, oil

Treasurys also rallied on Bernanke's remarks, sending yields lower. The benchmark 10-year note closed up 19/32 at 100 17/32, with its yield
TNX, -1.21%
at 5.056%. See Bond Report.

The dollar turned lower after the Bernanke testimony. The euro late in the day was up 0.8% at $1.2599. Against the Japanese yen, the greenback fell 0.4% to 116.84. See Currencies.

Gold futures rallied as the dollar weakened. Gold for August delivery ended up $13.30 at $642.80 an ounce, after falling nearly $40 over the past two sessions. See Metals Stocks.

Crude-oil futures fell sharply for a second session in a row after the Energy Department reported a rise weekly crude supplies, and an unexpected increase in motor gasoline inventories. Crude for August delivery ended down 88 cents at $72.66 a barrel. See Futures Movers

Yahoo slammed

Yahoo Inc.
YHOO
shares tumbled to their lowest level in nearly two years, closing down 21.6% at $25.26, after the Internet giant's quarterly earnings and sales fell shy of analysts' expectations. The Sunnyvale, Calif., company also offered up a weak third-quarter forecast.

Yahoo is facing stiff competition in the market for Internet searches from Google Inc.
GOOG, -1.72%
which makes more profit from each search query and is more profitable overall. Yahoo's troubles, however, failed to benefit Google, which closed off 1%. See full story.

Other earning standouts

IBM posted in-line results, with a 10% profit rise from a year ago helped by lower administrative costs. But revenue from its key global services and hardware divisions fell.

Big Blue's chief financial officer, Mark Loughridge, acknowledged there is "room for improvement" in some areas of its business, but he also underlined that he is confident with analysts' expectations for its fiscal year. The stock finished up 2.4% at $76.07. See full story.

It was another busy session for earnings in the financial sector, led by quarterly results from J.P. Morgan Chase & Co.
JPM, -1.56%
The investment bank's stock rose 5.7% to $43.05 after its net income more than tripled on a boost from its investment-banking business, which saw record fees and "solid" market results. See full story.

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